First things first: A fallacy is an error in logic and reasoning, and a cognitive bias is a tendency to make certain mistakes, a genuine deficiency in our judgment. Some social psychologists theorize that these limitations serve an evolutionary purpose, to help us process information at rapid speeds, especially in precarious situations. In the insurance and financial services industry, being prone to irrational thought can unnecessarily place a lot of risk on an investor’s health and financial security.

Advisors are no stranger to clients who are hesitant to buy or invest in ways that are smart and profitable. Fears, misinformation, lack of trust — the list of sales deterrents is long, and ProducersWEB certainly has its share of articles about how advisors can soothe clients’ and prospects’ unease. But I want to bring you face-to-face with the cognitive fallacies and biases undermining your sales success — the science of why we make irrational decisions — on both sides of the conversation, and how to overcome them.

Cognitive dissonance, the tendency to feel extreme distress when you hold contradictory beliefs, is at the root of many of our biases. Coined by social psychologist Leon Festinger and studied by behaviorist B.F. Skinner, cognitive dissonance comes from our deep-seated, often unconscious need to identify as consistent and secure in our views of the world.

For example, say your client reads about a high-performing stock from a less-than-impartial source. When researching the investment option, he is likely to focus on the material that proves its legitimacy (like a low debt-equity ratio) and to ignore warning signs (like declining markets).

Cognitive bias can impair an advisor’s judgment, too, particularly in the due diligence process. If you reach a conclusion too early, it will be easier for you to fall prey to this tendency.

Overcome it: It’s hard to talk someone out of their confirmation bias. If advisors aren’t careful, aggressive attempts at persuasion can cause clients and prospects to adhere more firmly to their original beliefs. However, subtle conversational methods can coax a client into thinking in a more balanced manner, like asking “but what if” questions, getting to the intention behind the belief, and playing devil’s advocate. And if you sense that your beliefs are biased, kudos for being self-aware. Bringing in a third party can help ensure that information is evaluated rationally.

2. Groupthink: the tendency to behave and make choices based on what the majority of a group is doing.

Groupthink is also known as herd mentality or the bandwagon effect, and it's closely related to in-group bias, the tendency to polarize into groups and view outsiders as inferior. This inclination comes from our tribal roots and is supported by evolutionary biology. The feel-good neurotransmitter oxytocin causes us to form strong bonds with our group and to presume our own groups are more intelligent, while simultaneously making us suspicious and doubtful of others.

Clients may want to conduct their financial planning and insurance purchases based on their family’s history of planning or outdated practices. Groupthink can also wreak havoc in your company or business, applying pressure on those with minority opinions to not speak up or go against the grain.

Overcome it: Encouraging free thought with your clients, as well as your employees and colleagues, might cut down on the tendency to succumb to the majority's opinions. Indentify with your client’s reasons for hesitance, and then use the bandwagon effect to your advantage by outlining what the most successful people are doing now.

3. Status quo bias: the tendency to be wary of change and thus, to remain as much the same as possible.

We like to stick to our routines, which offer us an often false sense of security. As you might guess, this is tied to the bandwagon effect, and shares roots in our evolutionary need to fit in and conform for survival (for more on this, read up on the Asch Conformity Experiments).

The interesting part is that maintaining the status quo is done with loss aversion in mind; but in terms of financial survival, status-quo bias can have serious repercussions. Samuelson & Zeckhauser, a 1988 study on investment decisions, found that people tend to lose money because they’d rather stay true to what they know than move forward with newer, better options.

This concept might sound familiar in marketing and practice management, too. Many ProducersWEB authors have written pieces about the important of implementing technological advances and social media, highlighting the fact that adaptation is necessary to survival in the industry. Yet, some advisors are resistant to change, touting loyalty to traditional practices and risking becoming irrelevant in an ever-changing world.

Overcome it: When clients are holding on for dear life, help them truly evaluate which points are working for them, and which views are opportunities for new growth. When a client is resistant to change, exposure to the idea in small doses might help them start to identify with the new behavior. Keep them updated on a fact or two every time you correspond. Shed light on their prejudices and show them how easy the change can be.

Neglecting probability is one the most prevalent themes in cognitive fallacies. We tend to live in a world where we strain to see what we hope to see, and go to all ends to ignore the unwanted. One common example is the classic coin toss. After flipping tails 10 times in a row, we irrationally tend to predict an increased likelihood that the next result will be heads, as if we’ve exhausted the 50/50 probability. This is also akin to the positive expectation bias, the tendency to predict that our good fortune is bound to strike after so many losses, and the availability heuristic, a misjudgment that occurs by assuming the probability of risk based on how quickly you can think of examples (like believing air travel is more dangerous than car rides, due to media coverage on plane crashes).

This fallacy limits our ability to properly assess risks, and unfortunately, investors make this mistake often. How many times has a trader sworn that a stock must be about to drop, since it’s been up for six trading days in a row?

Overcome it: Remember the key disclaimer in finance? Past performance is no guarantee of future results. Advise your clients to focus on fundamental and technical analysis of risk and probability, instead of this false logical argument.

5. Current moment bias: the tendency to prefer immediate gratification over long-term gains (even if the long term has an overall greater value).

Research from a 1998 study by Read and van Leeuwen illustrated this bias when asking people to make food choices for the coming week. While in the planning stage, 74 percent of participants said they’d choose fruit, but when the food choice was for the current day, 70 percent chose chocolate instead.

Also called hyperbolic discounting by economists, current moment bias can be seen in Generations X and Y, who are putting off saving for retirement. Research from LIMRA earlier this year showed that less than half of Gen X consumers picked retirement as their top reason to save, and Gen Y consumers rated retirement as their second priority, only slightly ahead of home improvements. This preference for immediate gratification is also evident in America’s level of debt and growing deficit.

Overcome it: Fear-based selling is probably not the way to go. Declining health and death are uncomfortable subjects, and this is likely the reason that many prospects avoid learning more about estate planning, long-term care and life insurance. Change the conversation from their mortality to the legacy they dream of leaving behind. When it becomes apparent to them how much they want to invest in their families, there will be a call to action.

6. Anchoring effect: the tendency to compare and contrast based on a relative limitation or a limited set of items.

The best example of anchoring, or the “relativity trap,” is when an item goes on sale. We tend to value the difference between the original price and the sale price more than the overall sale price itself. The original price acts as an anchor, a standard against which everything else is compared for relative value.

When clients observe that a purchase is “cheap” relative to similar options or a historic precedent, they tend to over-perceive the value of that purchase, when its actual, stand-alone worth may not be so enticing.

The anchoring effect is also responsible for strong first impressions and why they’re notoriously hard to get rid of. When a client walks into your office and meets you for the first time, her impression based on your appearance, cleanliness, presentation and demeanor is going to act as the anchor for her conclusions about you. Once she has pre-conceived notions, she is likely to succumb to confirmation bias and look for more evidence to prove her first impression of you.

Overcome it: The anchoring effect may cause your client to be overzealous about a risky option or too hesitant to purchase a beneficial one. By performing various price comparisons, you can help your client make a more level-headed decision. And, try to make a good first impression. If the first impression wasn't what you wanted, addressing this fact head-on can swiftly move the focus in a positive direction.

7. Post-purchase rationalization: the tendency to rationalize a faulty purchase to such an extent that one becomes convinced it was a great idea.

The spitting image of cognitive dissonance, post-purchase rationalization happens when, for example, an investor cannot come to terms with knowing: 1) he should not have invested in a particular stock, and 2) he did invest in that particular stock. These are truths that challenge his belief about his own consistent identity, and they must be resolved. Since it’s easier to change the first statement in our example than it is to be in denial about the second, rationalizing the purchase relieves the client’s initial distress.

There’s a saying that goes: “Good traders know how to make money, but great traders know how to take a loss.” Instead of trying to behave in a consistent manner, sometimes it’s better to stop in the middle of your tracks before incurring another huge loss. Post-rationalizing previous mistakes can lead to rosy retrospection, the tendency to remember our decisions as better than they really were, which can up the likelihood we’ll make the same mistakes over and over.

Overcome it: Advisors should never indulge an investor’s urge to post-rationalize a previous terrible mistake, but it can be hard to retrace the steps that led him there. Oversimplifying how the mistake could have been avoided is called hindsight bias, and it can depict the situation as having been far more black-and-white than it really was. Go back and note the red flags, admit the mistake, and use it as a lesson for the future.

8. The planning fallacy: the tendency to overrate our own capacities, likely resulting in insufficient planning and preparation.

Nobel laureate Dan Kahneman highlights the planning fallacy in his book, Thinking, Fast and Slow. Related to confirmation bias and in-group bias, the planning fallacy stems from assuming we are smarter and more capable than others. When aiming for a goal, we tend to overestimate the benefits of our future actions, while underestimating the time, costs, abilities and risks required.

Isn’t this the case with many clients and prospects, when planning for their and their families’ financial futures? Not only do they underestimate what needs to be done to ensure financial security, they tend to be overly optimistic about the future in general, assuming they won’t develop diseases or need long-term care, even when the statistics suggest otherwise.

Overcome it: Well, this is why people seek out financial advisors. They need someone with a more technical and logical understanding to help them develop a plan and a successful portfolio. By doing your research, outlining exactly what needs to be done, and being upfront about what it will take to get the desired outcome, you can squash your clients’ planning fallacies flat.
These glitches in our logic can be unfortunate, but by helping your client become aware of his or her biases, you begin to expose the bigger picture: that they originate from the ultimate biological purpose — to self-preserve. Here is one last bias, which is only a deterrent to sales success when it is not put into practice.

While many of the ways to overcome cognitive biases involve a broader education based on statistics, data analysis and weighing risks, these numbers won’t mean more to your clients than their security blanket biases unless you offer an alternative story to the one they’re telling themselves.

Ask them to tell you about their loved ones. Ask them to tell you about how their parents and relatives handled their affairs. After all, insurance and retirement investments are about the “what if” stories that keep us up at night, and having an answer to those “what ifs” is what advisors are really selling.